One of the vital developments in the banking and finance industry is exposing customers financial data, in which financial institutions’ customers may share their data with their organizations of choice to effectively handle their financial assets. This shift, known as open banking or open finance, paves the way for a more freely trading open economy.
An open financial ecosystem is emerging from changes in customer expectations, technological advancements, and regulatory policies. To better serve their customer base, financial institutions, and other participants (such as fintech firms) in this ecosystem collaborate to provide a wide range of resources. This ecosystem is growing and diversifying, ranging from “open banking” and “open finance” to “open economy.”
What is an Open Economy?
By building on the principles of open banking and open finance, an open economy fosters unprecedented rates of digital collaboration. It merges all user data with financial data, giving businesses access to a wealth of current information that can be used to deliver customized products and services to consumers.
An open economy will radically alter how society functions; however, consumers must approve third parties to access their data. New infrastructural and technical advances, along with extensive legislation and consumer protections, will be needed to achieve a completely open economy.
Open economy reflects the obvious placement of individuals as the true owners of their data, the power for them to authorize the sharing of their financial data with any third party of their choice, and the enabling technology.
Data will be freed, innovation will speed up, and organizations of all types will have the ability to develop new business and income models if the open economy is effective.
Open Economy Outlook
It appears that by 2024, the number of people using open banking would have increased by about 50%, hitting around 132.2 million people worldwide. The explosive growth of open banking indicates well the future of open finance and an open economy. These innovations will transform every sector of the economy and alter how consumers, companies, and financial institutions use data.
How Open Economy differs from Open Banking and Open Finance?
Customers and businesses alike have gained advantages from the enhanced accessibility of the financial system that has resulted from the development and widespread implementation of open banking and open finance.
Together, open banking, open finance, and now open economy are redefining digital finance in revolutionary ways. These three initiatives are reshaping the future of consumer finance, consumer data, personalized service delivery, and more, causing widespread change across several sectors.
Though these concepts are interconnected among each other, they are not the same.
Let us explore the difference between Open Banking, Open Finance, and Open Economy
Open Banking | Open Finance | Open Economy |
|---|---|---|
| Open banking enables banks to share consumer data with third-party service providers via application programming interfaces (APIs) and a centralised dashboard for interrelated banking services. | Open finance differs from open banking in that it includes not only banking data but all financial data and transactions. | To promote a higher level of digital connectedness, an open economy builds on the principles of open banking and open finance. It will merge all user data with financial data, giving companies access to a wealth of added information that can be used to deliver personalised products and services. |
| Data is shared for Account Information, Payment Initiation | Data is shared across financial sectors such as Mortgages, Insurance, Pensions, Investment | Data is shared across different sectors such as E-commerce, Payroll, Healthcare, Utility, Gaming, etc. |
| The third-party organisations are granted authorization to access user account information via a protected back-end technological link and may afterwards use such information as stated. | This information can also be used by third-party organisations to conduct evaluations. | Before third-party organisations can utilise a user’s data, they still require the user’s consent. |
| Helps financial institutions in their efforts to enhance consumer interaction and new product development. | Banks may enhance and extend their present services by incorporating both financial and non-financial items to provide customers with more choice and personalisation. | Build a banking platform that provides customers with a seamless, unified, hyper-personalized, contextualised, accurate, and proactive banking experience. |
| Applications include Account aggregation, Subscription models, KYC (Know Your Customer), Anti-money Laundering, among others. | Applications such as PFM solutions, Embedded finance, Open pensions, among others. | Application extends to Tax authorities, E-commerce, healthcare, digital banks, etc. |
Role of Open Banking/PSD2 regulations in leveraging Open Economy
Open Banking and the adoption of PSD2 regulations have given a major boost in recent years to the idea of an open economy. These regulatory frameworks have paved the way for a more open and interconnected financial ecosystem, thereby promoting increased competition, improved innovation, and constructive cooperation between financial institutions and fintech firms.
Open Banking promotes customer-focused banking experience by making financial data more accessible to businesses and consumers while increasing the efficiency of the financial system and making transactions more affordable and accurate. Implementing PSD2 rules reinforces the underpinnings of an open economy.
Banks are obligated to allow authorised third-party providers access to customer account information and payment initiation services per Payment Services Directive 2. This not only benefits consumers by expanding their options, but it also promotes innovation by facilitating partnerships between established financial institutions and newer, more innovative fintech firms.
An open economy is greatly aided by Open Banking/PSD2 regulations by removing barriers to the free and secure exchange of financial data. These regulations increase competition among financial service providers and offer customers more agency by allowing for seamless integration between different service providers. They additionally motivate fintech companies to provide personalised products and services and ultimately lead us closer to a more inclusive and successful open economy.
For instance, establishment of financial services like cross-border payments, fraud detection, and risk evaluation could be made possible with the assistance of open banking/PSD2 regulations.
Implications of Open Economy for Consumers, FIs and Businesses
An open economy minimises barriers for the free flow of products, services, and funds across boundaries and thus has broad implications for consumers, financial institutions, and businesses.
An open economy, therefore, promotes international trade and investment at affordable terms. Now more than ever, consumers have the power to assess costs and quality across many markets to zero in on the greatest deals. Moreover, an open economy stimulates innovation as businesses try to suit the needs of customers all around the world.
The role of financial institutions in an open economy is equally significant. They make cross-border transactions easier, offer options for funding to businesses that plan to grow worldwide and provide a range of investment opportunities for people looking to diversify their investment portfolios internationally.
Financial institutions (FIs) have evolved their services to accommodate the needs of customers in an open economy by offering worldwide banking services, foreign exchange services, and investment products intended for international markets.
The open economy presents both challenges and prospects for businesses. Competition from foreign businesses entering domestic markets is one challenge they confront. Yet it can also be regarded as an opportunity for businesses to connect with more customers by tapping new markets besides their current ones. To keep up with the rest of the world and thrive in today’s global market, businesses must continually explore and upgrade.
Role of Fintech in Open Economy
The importance of financial technology, or Fintech, has grown, as businesses and consumers look for global integration and connectivity.
Utilisation of Application Programming Interfaces (APIs) is a significant factor in Fintech’s advancement in an open economy. APIs allow smooth communication between many platforms and systems.
Applications programming interfaces (APIs) are crucial to the success of Fintech because they allow for the safe transfer of information between banks, TPPs, and other parties involved. This enables improved cooperation and interoperability across different participants in the financial ecosystem.
The development of TPPs has further altered the way Fintech functions in an open economy. These third-party providers employ APIs to gain authorised access to consumer information from banks and other financial institutions. TPPs can provide cutting-edge services like account aggregation, payment initiation, and customised financial guidance in this way.
Additionally, the function of Fintech in an open economy goes beyond that of a traditional financial institution. It includes a broad spectrum of sectors, from fundraising to financing to investment management tools to digital currencies. The extensive adoption of such technologies has enabled protected, hassle-free cross-border payments.
By connecting with TPPs using APIs, banks and other financial institutions can increase both the scope and depth of their product lines. By doing so, FIs may speedily introduce cutting-edge offerings from the industry’s top vendors.
Instruction to Third-party Providers
Open ecosystems operate on the premise that customers have full control over all their data, both financial and otherwise. Financial institutions and fintech companies provide services “on behalf of” their customers.
Third-party access to financial data should adhere to the following fundamental principles:
- Customers’ data can only be accessed or shared after receiving their explicit authorization. Also, they ought to be offered a simple and reliable way to revoke it.
- The duration and frequency of the requested access to the customer’s data, and the stated purpose (function), must be disclosed to the customer as part of the permission procedure.
- The TPPs should give users the option to limit the scope, duration, and/or frequency of the data’s use by authorized recipients
- Strong customer authentication (SCA) must verify the identity of the customer giving consent. Each use case will have a different level of risk, which will influence how SCA is implemented. For example, SCA may be required every time a payment is initiated, but just once to report account balances.
- To avoid unauthorized access to data, TPPs must authenticate themselves to data providers (e.g., FIs) in a secure manner. For instance, PSD2 in Europe mandates that TPPs use an established electronic identification certificate (eIDAS) to verify their identities.
- Customer information must be kept private in the same way it always has been. This means that your communication route must be secure. To prevent the unwarranted disclosure of private customer data during transmission, third-party access should be granted only through secure (encrypted) methods, such as an API.
Strategies that Bank & FIs should Follow to Leverage Open Economy
Banks and financial institutions must welcome the concept of an open economy to stay competitive in the contemporary financial market. These businesses may expand their reach and better serve their customers by taking advantage of the benefits of the open economy.
Financial institutions and banks call for new strategies that are in accordance with the principles behind an open economy to endure this transformation. Fostering transparency, collaboration, and interoperability is vital for establishing an integrated system that suits the needs of every party involved.
By Collaborating with fintech companies and other non-traditional players in the financial industry, banks shall integrate third-party services and technologies into their existing framework to expand their customer base while enhancing their services
Adopting open APIs (Application Programming Interfaces) is also essential for promoting the exchange of data between participants in an open economic environment. This not only encourages innovation but also offers personalised service to each consumer.
Furthermore, financial institutions (FIs) should work to promote a setting that supports innovation and experimentation. Creating such a setting involves allowing employees the opportunity and resources to experiment with cutting-edge technologies and notions.
Financial institutions can establish themselves as market leaders in the open economy era by adopting these tactics. In today’s interconnected world, they can make use of modern technology, work together with third parties, and provide improved services to satisfy the varying demands of their customers.
Global Perspectives & Initiatives
While open banking and finance provide several potentials for FIs to give more value to their customers, they also increase competition from fintech companies and other startups to the open ecosystem.
Financial institutions in Europe are increasingly able to provide open payments to retailers and other companies. Financial institutions may facilitate the operations of fintech businesses by meeting their requirements for BaaS, therefore enabling fintech businesses to serve their customers.
The global initiatives regarding open economy range from those that are limited to financial services alone (European Union) to those that reach beyond finance into other areas (Australia). In Europe, banks are required to grant TPPs access to payment accounts, but TPPs are not permitted to grant banks access to any of the data they collect or store. Some other regions have open-door policies when it comes to data exchange.
Though, legislators in many nations are implementing a variety of initiatives that encourage and speed up the roll out of data sharing frameworks in the banking sector.
Open Economy Use Cases
Financial Services
Next-generation financial services can be powered by combining banking data with data from e-commerce businesses, payroll providers, healthcare institutions, energy companies, and so on in the digital arena.
Payroll data supports innovative financial products including automated investing, earned wage access (EWA), income-based loans, and savings programs.
Embedded Finance
One of the most important developments in the financial sector, embedded finance, will let brands and digital companies introduce embedded financial solutions to their customer base.
Remote Employment
Technology in the workplace has evolved to accommodate the growing trend of remote employment. They help multinational corporations with global payroll, taxation, compliance, and benefits administration.
Digital Bank
The debut of the digital bank is intended to appeal to youthful clients with its digital services and lifestyle platform. In three distinct applications, it markets hyper-customized monetary and non-monetary goods to children, teenagers, and adults. Especially, facilitates a unified banking environment for clients.
The ‘Open Economy’ is changing the ways businesses and customers interact for mutual advantages through the proliferation of open data, models, talent, and experiences.
Open Economy Regulations & Data Privacy
The proliferation of “open economy” initiatives is widespread. Some are market-driven, such as the U.S., while others are governed by regulations (such as the EU and the U.K.). The initiatives vary in scope: While some are limited to financial services only (in the EU), others reach well beyond banks.
Globally, regulators are working to encourage innovative ideas and healthy competition between traditional financial institutions and fintech startups. Regulations are being issued by an increasing number of nations that provide individuals with the right to decide who has access to their financial data and by extension, who benefits from it. These consumer rights are sometimes extended to other spheres of the economy.
Let us quickly go over the worldwide landscape of consumer data ownership, sharing, and protection regulations that are in effect.
European Union
Data Act
Empowers both consumers and businesses to define who can derive value from data and under what circumstances.
General Data Protection Regulation
A set of guidelines for how the personal information of European Union (EU) citizens should be collected, stored, and processed. It safeguards the data and offers greater authority to the EU citizens over their data.
United Kingdom
United Kingdom adheres to the GDPR guidelines of European union.
United States
California Consumer Privacy Act (CCPA)
Allows customers greater power over the personal data that companies collect about them.
California Privacy Rights (CPRA)
Includes additional consumer privacy safeguards which will go into effect in 2023.
Canada
The Consumer Privacy Protection Act
This piece of federal legislation requires businesses to adhere to new minimum privacy standards. Consumers would have more control over firms’ data collection and use and reinforce the penalties for businesses that disregard the new regulations.
Australia
CDR (Consumer Data Right) law
Governs how businesses must safeguard customer data and how they can access, use, and share it. The industries of telecom and energy will be the focus of the upcoming phases.
Brazil
General Data Protection Law (LGPD)
A comprehensive regulation that mandates that organizations implement sufficient safeguards to protect personal data and adhere to specific processing guidelines.
Top Concerns About Data Privacy
- Data must be kept confidential, and their data ought to be used exclusively for the stated reason.
- Ensure that the data is secure and will not be breached, mishandled, or leaked to unauthorized parties.
- Make it simple for consumers to provide and revoke their permission to access data.
- Offer interoperability i.e., the same experience for granting consent to the exchange of data among various suppliers.
Final Thoughts
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With unparalleled flexibility, you can easily embrace the latest developments and position yourself as a leader in the new era of consumer-centric banking.
